Tuesday, June 29, 2010

Bookkeeping: Will Be Selling Some SPY Puts 3:59 PM

With S&P 1040 broken the floodgates should open nicely for bears in the closing 25 minutes.  I bought another tranche of puts around S&P 1046 (these are SPY July 103s).  I'll sell some of my puts into the close in 15 minutes but I am really hoping for one of those dark opens tomorrow which unlike today I will consider the real swoosh.  My 'teflon' stocks, while down, are still mostly hovering near their 20 day moving averages - I'd like to see real pain inflincted before feeling capitulation has happened.

I will be anticipating an oversold bounce in the next 48 hours.  If you are talented you can try to play it; but for most simply staying out of the way is the best course of action.  Just as we rallied 8.2% in 10 sessions (wax on!), we've now lost it all in 6 sessions.  (wax off!) The move to S&P 1130 on yuan revaulation a week ago Monday was one great headfake. We're down almost 100 S&P points since.

EDIT 3:55 PM - well looks like we're going to hold S&P 1040 after all on the close; an urgent buyer rushed in here at the close because he just had to be in on this market in the closing moments on a -3% day. ;)  Or maybe some short covering although this would not seem the place to do it.  An "up" open in premarket tomorrow would not be reasonable based on today's action and I'd expect it to be faded.  I took some SPY put exposure off the table, but kept the lion's share.


Why S&P 1040 is So Important

As I've written a few times now, I don't believe in "quadruple bottoms" - hence I believe S&P 1040 is destined to break.  After that happens I expect some panic selling and then an oversold bounce.  The problem nowadays on the long side is while the oversold bounces are extremely violent (we tend to get +3% days) they are not leading to lasting positive times.  It's just quick flip trading, useless to building intermediate term positions. 

As this chart shows 1040 has been hit 3 times now and today could be considered the 4th.  This level is important because below 1040 the support gets very iffy for almost 100 S&P points.  Due to the 45 degree angle rally without relent we enjoyed much of 2009, especially post July 09 there is little real support.  I've highlighted 3 support areas that mark what I consider weak support via purple lines below - these indicate in reverse chronological orders low of October 2009, September 2009 and August 2009. 

[click to enlarge]

If those levels are breached we are talking the highs of June 2009 which are just over S&P 950.  Obviously we are not talking a straight line down and indeed I expect even if this happens for the bears to be blown up here or there with the bipolar market that can follow a 90% down day with a 90% up day.  But indeed, the tables could be turning very quickly in a short amount of time.

This is setting up for a very interesting Friday since expectations are for quite poor employment data after the "punked" moment delivered to us by Obama and Biden a month ago.  The market is going to be oversold barring a big rally tomorrow or Thursday and expectations are low.  In a perfect world we have a washout in the next day or two (I don't consider today to be a washout) setting up for a potential oversold rally Friday.  But again, these rallies - while vicious - are fleeting until the S&P 500 gets back over the 200 day and 50 day moving averages.

A longer term issue is the 'death cross' - that is the 50 day moving average moving below the 200 day.  We are not that far away (a week or two).  So intermediate term - things are looking quite nasty, even though on any individual day bears can be roasted on an open fire by our traditional premarket magic, followed by a +3% session.  This despite what I think are going to be some stellar earning reports in about 3 weeks by the new masters of the universe - the U.S. multinational corporations.

What is General Electric (GE) Telling Us?

If there is such a thing as one stock as a tell on the world economy, I'd nominate General Electric (GE).  Not only does it have its hands in multiple industrial and consumer oriented markets, it has a large financial arm to boot.  With that said, I am wondering what the chart is telling us nowadays, if anything.   It is at lows of the year and fast approaching November 2009 lows. Excluding the flash crash and day after, it's been a near continuous drop since April.  Then again, what the heck was GE telling us in April as it had not a care in the world?  I'm not a big fan of the club who says the stock market is a great predictor of the future - for that group I'd like to ask what the market was predicting in early 2000, and fall 2007 - but I do think the market is a great indicator of PERCEPTIONS of reality.  Seems like big money is turning our way in terms of evaluating about what is coming down the pike.

No position

Bookkeeping: Closing Valassis Communications (VCI)

Valassis Communications (VCI) simply seems to be the victim of student body left trading... when the market was benign or even going through the selloff in May, it was holding up well.  Now it seems unable to withstand the pressure.  Since I never really got the chance to build this position up, I let a nice gain in this one turn into a loss.  (I would have taken some incremental gains along the way, but my position size never grew large enough to bother)

With the stock below the 50 day I am going to part ways with the a 7% loss on the 0.6% exposure.  As always, of course this one can turn right back around and rally, but the greater probability now lies with failed rallies and more downside as support is broken.

As an aside, we are being held up at S&P 1040s level which everyone and their mother knows is support.  Again, my conviction is, it will not hold this time so I've bought some downside hedges (just some light SPY puts for now).  The same traders who were buying aggressively on the long side in the S&P 1080s Thursday on Realmoney.com now say today is a "washout" and we can buy again.  I disagree again.  This time the bounce off 1040 is going to be an opportunity for shorts IMO.  Like a broken clock eventually this cadre of traders telling us to buy here, there, or everywhere is going to be correct.  But gosh, quite a bit poorer by the time they are 'right'.

[May 25, 2010: Bookkeeping - Beginning Valassis Communications]

No position

Bookkeeping: Closing Atheros Communications (ATHR)

I've written about this name a few times lately, as recently as last week [Jun 24, 2010: Atheros Communicatins Bewilders Me] and while someone with a 3 year horizon should make good dinero buying the name here, I have a shorter term time frame and will be closing the last 0.4% exposure with a 26% loss.  If you are a long time reader you will realize I never take 26% losses because I don't average down and in fact when a stock begins to break support I either cull or leave entirely.  I did make an exception in this case (with a very small exposure).  Many stocks I held with similar chart formations to Atheros Communications (ATHR) I dumped in May as they broke support, with losses of 4-8%.  I decided to hold onto (while cutting it back) this name for fundamental reasons, and you can see the degree of loss difference.  Sometimes those names that I cut reversed back up and my sales looked foolish but off the top of my head only 2 names (SWKS, RVBD) rallied with any vigor from where I sold them in May so I consider the odds on my side as many other names went on to far bigger losses. 

I say this to highlight why technical analysis is such an important part of my strategy... it marks the difference between a 6% loss and a 24% loss. And why "averaging down" is another thing I rarely do.

I am sure I will be back in this name at some point in the future, and frankly at a  higher price.  But it needs to get back into good technical standing - which is now a long ways away.

No position


Amazon.com (AMZN) to Fill October 2009 Gap?

Thanks to reader Kevin for pointing this name out, it has been off my radar.  Amazon.com (AMZN) made a nice higher high in April 2010 (no "double top" or anything of the sort) but has been weak of late.  Obviously the iPad hurts its Kindle line but that is not exactly their core line.  Valuation has always been an issue for Amazon so you can't make the case it suddenly got expensive; it always has been. 

Technically the stock broke below the 200 day in early June, then rebounded (head fake for bears) as "risk was on" and all stocks were deemed as rally candidates during that 2 week move where the S&P 500 gained 8.2%.  As of last Thursday it broke back below the 200 day, closed back above Friday, then back below yesterday.  Today as "risk is off" it is getting hammered.

There is a chasm gap to fill back from October 2009 so here is a nice candidate to watch to see if the gap 'fills'.  Remember, stocks are not like indexes - gaps need not fill in all cases, but it's still the general rule that they do.  With stocks it can be 4-5-6+ quarters before it happens.

If it happens here look at $94.10, the high of Oct 22, 2009.  (the low Oct 23, 2009 was $110.62)

Recall Amazon.com and Research in Motion (RIMM) [Jun 25, 2010: Research in Motion Working on Filling the Gap of April 2009] were some of the key momo names of the past few years - the ball has been passed to a new generation, but I submit that eventually those names will have the same fate. 

No position

Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life

On an anecdotal basis I began noticicing 3 years ago how increasingly asset classes have begun moving together in monolithic nature; I attributed this to the growing dominance of ETF trading (which has surpassed usage of individual equities for much of the 'fast money institutional' crowd) along with HAL9000 and his merry band of brothers, all programmed by the same type of PhDs data mining the same fact sets.  At the time I called it "student body left" trading, and it seemingly has only increased each year since.  Now people call it "risk on" or "risk off" ... whatever the case, it has become a bipolar market where there is no memory from day to day and that entire day is traded off the news of that specific morning... but can be forgotten by tomorrow.  We used to be a market influenced by lemmings, but now they run the market.  Remember 2 weeks ago?  Every asset up... get out of the way.  Risk is ON!  5 weeks ago?  You own stuff? Loser!  Risk is OFF!  Etc. 12 weeks ago?  Everything must go up!  Last week? Sell sell sell - everything!

Last summer Bloomberg noted this with actual data [Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever] and today has a follow up story as the trend is only increasing.   Wax on! Wax off! Student body left! Student body right!  Individual stock or asset selection?  So old school and out of fashion.  Today is as good as any other day to highlight this as it is yet another 90% day, at least the 15th since late April. (I believe we've had ten 90% down days, and five 90% up days since)
  • The Standard & Poor’s 500 Index and 10-year Treasury rates posted a correlation coefficient of 0.8412 in the 60 trading days through June 16, showing stock prices and bond yields were the most linked in Bloomberg data going back to 1962.
  • Rising correlations show investors are ignoring relative values among industries and assets and reacting to day-to-day signals on the economy, (amen) convinced Europe’s debt crisis will spur the second global contraction in three years.
  • Equities are also moving in lockstep with each other and assets tied to economic growth. The correlation coefficient between the S&P 500 and the Thomson Reuters/Jefferies CRB Index of 19 raw materials has been above 0.5 since April 13 and climbed to 0.77 on May 14, the highest since at least 1956, data compiled by Bloomberg using 30 days of trading show.
  • Almost 80% of swings in stocks within the S&P 500 are related to movements in the broader market, according to London-based Barclays Plc.
Let's stop for a moment and absorb that last nugget.  I've written in countless pieces in 2008 and 2009 that the reason I focus SO MUCH on the S&P 500 chart is the market movement now caters for 70% of the movement in stocks.  I guess I was underweighting it... more like 80%.  That is astounding.  Effectively this means whatever the underlying fundamentals of the company (or commodity!) almost all that matters each day is which direction the market moves.
  • “Correlation is one of the great lessons of the whole crisis, and it hasn’t let its grip on the markets go,” said Barry Knapp, the New York-based head of U.S. equity strategy for Barclays. Knapp estimates the S&P 500 will climb 13 percent to end the year at 1,210. “Whatever the nature of the crisis, the one decision investors seem to make is whether they should be in risky assets or out.”   (risk on! risk off!)
  • “Investors are very worried about which direction the global economy is going to take,” said Bart Zeldenrust, senior fund manager at Rotterdam-based Robeco Group, which oversees about $167 billion. “Correlation was very high during the financial crisis because there was only one bet that you could make in your portfolio: risk is on or risk is off. And it’s still very much so. It’s not a good sign.”   (well there you go, he literally says it)
  • The lockstep moves are hurting strategies designed to smooth out fluctuations across equities, industries and assets. Standard deviation, a measure of the variation in returns, for mutual funds investing in the biggest U.S. companies that have an average value similar to the S&P 500 fell to 5.8 percent in the first quarter, based on data compiled by Lipper & Co. and Bloomberg. That’s the lowest level in three years.
  • It’s been impossible for stock pickers lately,” Savita Subramanian, quantitative strategist at Bank of America Corp. in New York. “It’s been less about stock selection, less about fundamentals or company management, and it’s been all about macro.”

Bookkeeping: Selling Direxion Small Cap Bull 3x (TNA) Upon Open as China Breaks Down

With the S&P 500 firmly below my pivot point of 1070 at the open, I will be ending my 2 day trade with Direxion Small cap Bull 3x (TNA) and selling it at the open for a loss.  Certainly the market may bounce after the opening gap down, but on the other hand it could also be a 'trend' day down where it drops all day - who knows.  The bottom line is this was put on for a quarter end window dressing which usually happens in the days before the last day of the quarter (which will be tomorrow) - which has not happened.  (the cynic out there should note how many market veterans now 'expect' the stock market to go up a few days before quarter end... free markets and all.)

Not only was the action Friday snooze inducing, yesterday's might have been even worse.  Absolutely no life - much like the U.S. soccer team in the opening 15 minutes of every World Cup match.  So we'll take a loss on this one, which is the opportunity cost of acting like a lemming; I should have noted that so many traders I scanned on the internets (sic) were all positioned for the same end of quarter manipulation it seemed unlikely to actually happen.  I will also look to take in some of the long exposure on individual equities if they begin breaking support which seems likely in some cases.
Broken record alert - 2 ranges, 1040 to 1070 and 1070 to 1100.  Today's premarket move will push the market firmly into the lower range sub range...  on the plus side I get to break out my trusty 10 year old hat.

While S&P 1040 has held as support the last few iterations, I have never heard of a quadruple bottom so if we get there this time (which seems likely) I do NOT see it holding this time around.


I am not clear exactly why the futures are down so much specific to today - we have China down sharply overnight but part of that is a massive IPO that is going to suck in a lot of liquidity.  Also some fears of slowdown Europe is China's main trading partner.
  • China’s exports face “strong headwinds” in the second half of the year from policy tightening measures and the European debt crisis, reducing prospects of a rebound in the stock market, Citigroup Inc. said in a report obtained yesterday.
  • The Shanghai Composite Index retreated 4.3% to 2,427.05 today, the biggest drop since May 17 and the lowest close in 14 months.   Agricultural Bank of China's record-breaking initial public offering will draw money away from other stocks and depress prices overall. The IPO, which has separate listings in Hong Kong and Shanghai, is expected to raise $23.2 billion, making it the world's largest.
Please note this chart is delayed by 1 day but you can cleary see a close below 2500 marks a new leg down.

[click to enlarge]

Greece CDS spreads have blown out again but that was the case last week as well... some vague worries about bond auctions are also being mentioned.
  • European investors were cautious ahead of bank repayments of euro442 billion in credits to the European Central bank later this week as well as debt auctions in France and Spain.

From this seat, the most worrying thing perhaps is that 10 years U.S. Treasuries are at the lowest level since 1962, barring the 'end of the world' scenario in latter 2008 and early 2009.

At best this points to expectations of lower economic activity ahead, and at worst it points to our long held call of "we're Japan!", or more specifically a bout of deflation.   Please note I have not predicted widspread deflation, nor inflation (the economy is experiencing both depending on what sector we are speaking) but in many pieces since 08 I have said tongue in cheek, based on policies undertaken, that surely "we are not Japan" despite following almost all the exact same 'solutions' (only bigger) they did.  [Mar 4, 2010: U.S. Still Seems More Apt for Deflation than Inflation]

Insanity: doing the same thing over and over again and expecting different results - Albert Einstein.

That said, I have taken the out of the mainstream view that a bout of deflation is necessary for the bottom 2/3rds of Americans (private sector workers, not public) - as their cost of living has increased well in advance of their wage structure the past decade or two.  [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold]


Monday, June 28, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 47

Year 3, Week 47 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 76.2% (v 70.8% last week)
17 long bias: 21.8% (v 16.8% last week) 
2 short bias: 2.0% (v 12.5% last week) [Includes 1 'long dollar' position]

19 positions (vs 24 last week)

Weekly thoughts
Looking back at fund exposure last week, with the advantage of 20/20 hindsight of a -3%+ week, one would think a quite hedged exposure would have worked out well.  Unfortunately, a Chinese announcement of some vague yuan revaluation policy, set world markets on fire including U.S. futures and multiple short positions were stopped out in the opening moments of the week.  Effectively that marked the high for the week and other than a quiet day Friday, mostly affected by Russell 2000 rebalancing, it was downhill from there.  Monday morning [Jun 21, 2010: S&P 500 Up 8.2% in 10 Days] I noted the sharp rally in the S&P 500 and said we were due for a pullback, but I certainly did not expect it to happen within hours - and not with such velocity.  In a snap the S&P 500 went from being over (intraday) the 50 and 200 day moving averages, to below them by mid week.  Hence, using the simplest of methodologies - bullish over the 200 day, bearish below the 200 day - once again the yellow caution flag is up. Much as we had in May, we sit in 1 big range of 1040 to 1110 with 2 sub ranges separated by 1070.  Everyone waits to see which side of this range we pop out of this time around as "risk on, risk off", "student body left, student body right" trading dominates everything as it has the past few years. Other than that, the only major development last week was the detachment from obsession of the Euro, as the currency held flat while the S&P 500 cratered and a FOMC meeting that has become a non event as easy money is pledged for as long as the eye can see.


This will be a busy week in economic reports unlike last which were dominated by some horrid home sales data.  Theweek will be dominated by Friday's monthly employment report which might actually surprise to the upside since expectations are now poor again, after last month's headfake by Prez Obama and VP Biden ("the job report is going to be strong!").  But the bigger picture, no matter what one month prints, is poor as structural unemployment is under reported as economists are surprised by an economy that at this point coming out of a steep spiral, should be creating 300-400K private sector jobs.

Monday - Personal Income & Outlays; not a market mover.

Tuesday - S&P Case Shiller House Prices & Consumer Confidence.

Wednesday - Chicago PMI

Thursday - ISM Manufacturing, Construction Spending, Pending Home Sales - the first of these reports will most likely capture the most attention

Friday - Employment Data, Factory Orders


For the portfolio, we were positioned decently for a market swoon with the most individual short positions held in more than a year - but were taken out of quite a few in the Monday morning moon shot.  A few other short positions were liquidated as the week went by to lock in profits, with the hopes of getting them back on a rally.  As currently positioned I am very near term "bullish" only through Tuesday-ish, with the hope that 'window dressing' by the long only fund managers gets the S&P 500 up closer to 1100.  At which point I will liquidate and begin focusing again on the short side.  If indeed there is no early week / end of month rally - we'll cut bait and focus on shorts below 1170.  As for last week:

On the long side:
  • Monday, I restarted a smallish position (0.6%) Chinese coal name L&L Energy (LLEN) as it broke out.  However I was aware in the 'student body left' environment, if the market sold off this stock would be hit regardless of fundamentals or breakouts.
  • Wednesday, as the S&P 500 fell below the 200 day moving average I got more defensive.  I closed the L&L Energy I had bought Monday, NetLogic Microsystems (NETL) which also was a recent purchase, and First Trust ISE Revere Natural Gas (FCG) as the hedge fund algo's abandoned natural gas stocks after a 2 week run.
  • Moving up the relative strength chart, I began a modest 0.75% exposure in Netflix (NFLX).
  • Friday, I cut some Sandisk (SNDK) exposure as the stock was holding in quite well but had a gap to fill, was hoping to buy it back lower if possible.
  • Late in the day after what appeared to be a successful retest of S&P 1070, I went long for a trade into quarter end "mark up" with exposure added in Salesforce.com (CRM), Netflix (NFLX), F5 Networks (FFIV), and TNA ETF.
  • Restarted South American internet company Mercadolibre (MELI) with a 1.4% exposure.

On the short side:
  • Monday morning I was stopped out of roughly half my short exposure for losses - Pitney Bowes (PBI), Discover Financial Services (DFS), and Celanese (CE).
  • Thursday, I covered Energizer Holdings (ENR) and Hartford Financial Services (HIG) for 4% gains.

Sunday, June 27, 2010

Updated Position Sheet

Cash: 76.2% (v 70.8% last week)
21.8% (v 16.8%)
2.0% (v 12.5%) [long US dollar positions are considered "short"]

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

[click to enlarge]

LONG (1 photo file)




Friday, June 25, 2010

No Pizzaz

No life this afternoon ... no energy.   Both bulls and bears failed to show up.

Thankfully we have premarket Monday when certainly something will awaken the spirits to cause a +0.6% opening.  Otherwise back to the dark side on any movement below S&P 1070. 


Bookkeeping: Restarting Mercadolibre (MELI)

I flipped a coin when choosing between Akamai Tech (AKAM), Acme Packet (APKT) or Mercadolibre (MELI).  The coin landed on its side so MELI it was.  Another addition to the wing of "valuation does not matter". [Apr 26, 2010: Yep, It's Starting to get 1999ish Out There - Analyst Upgrades Mercadolibre and Slaps 60x Forward Estimate on It]  Restarted the position with a 1.4% exposure.

All 3 of these exhibit very good relative strength - I have no idea if the market rallies which will go up the most, or if the market dumps which will hold up the best.

I don't believe we've owned this name since late 2008. As I have for years, I remain boggled why this is an independent company and not bought out by Ebay.

[Dec 24, 2009: IBD Mercadolibre- E-Commerce Sales Soar as Latin American Households Get Wired]
[Mar 31, 2008: Mercadolibre with 3PM Spike & Forbes Article]

Long Mercadolibre in fund; no personal position


Bookkeeping: Bought some Salesforce.com (CRM), Netflix (NFLX), F5 Networks (FFIV) and TNA ETF

I think bears had their chance this morning and could not break 1070 convincingly.  With 2.5 hours to go and everyone of importance at the Hamptons, I'd expect some 'mark up' action into the close.  With 1070 holding, a run to 1100 by Monday (of course in premarket) looks more probable.

I've added to Salesforce.com (CRM), Netflix (NFLX), F5 Networks (FFIV), (about 0.75% to 1% each) and topped it off with some TNA ETF (4.5%) - I'll be expecting to cut these back in about 20 S&P points if and when.

I did not go with the lemmings yesterday because I wanted to see 1070 tested, and we had that happen this morning.  So I too will join the lemming parade - if temporarily. If you are a cynic (hand raised) you just have to believe the long only funds will mark this market up on quarter end, and it is never done on the last day since that is apparently the only day the SEC will frown on it.  So that leaves Monday and Tuesday.

If this all plays out so perfectly I''l be interested in remounting some individual shorts around S&P 1100.  Already labor report Friday approaches a week from today - another curveball straight ahead.

Long all names mentioned in fund; no personal position.


Research in Motion (RIMM) Working on Filling the Gap of April 2009

Stock gaps need not fill, and many times when they do take quarters if not years to go back to "fill in the hole" - on the other hand gaps on indexes more or less always fill (with a few historical exceptions) and do so usually in short order (months).

Research in Motion (RIMM) reported an "ok" quarter but the stock was weak ahead of the figure (below all key moving figures) and is being sand blasted today.  It has broken 2009 lows and now working on filling an earnings gap "up" from April 2009.  Despite the competitive threats from Apple (AAPL) and Android, one would think with $5 of earnings power "value" managers would finally begin sniffing around this former high grower.

The problem is, that was the thought process with Nokia (NOK) as well - that did not work out too well.

Let me tell you - not -5 years ago Nokia was the clear king of the hill in mobile; truly a historic fall from grace in what was once the safest amongst 'tech' stocks.  (Nokia is pushing towards March 2009 lows! Double bottom?)

I am actually quite disappointed with the technology push at RIMM; they seem to have sat on their laurels - it is one thing to be face planted via Apple; they do that to everyone.  But to have Google come up with Android and not even match that... quite unacceptable.

No positions

Bookkeeping: Cutting Some Sandisk (SNDK) Exposure

I cut about 15% of the Sandisk (SNDK) position yesterday as the market weakened, even as the stock held its 20 day moving average.  Today I am going to cut about 25% more which roughly halves my stake.  Both sales at decent losses, 6 to 9%.  The stock has a gap it is working to fill and is part of the 'teflon' crew at this moment.  But as a hostage to 'student body left' trading it's working on its 6th straight down day.   I'd like to see these 'teflon' stocks take more of a beating before feeling the market can bounce in a more substantial way; they were so overbought that even these selloffs have only taken most down to their 20 day.

The chart is still fine, making higher highs and pulling back in a normal manner - hasn't breached the 50 day other than a few of the gut wrenching drops in the greater market in early May. 

I am thinking of placing an order to rebuy nearer to the 50 day moving average of $43.15 and then if the stock breaks down below the 50 day that will probably coincide with a S&P 500 breaking down below 1040 and we'll need to cut back again.  But for now just taking down the exposure and then watching.

As an aside I covered the moderate (less than 2%) short TNA (3x small cap) I mentioned I put on yesterday afternoon  when everyone else was going long as the market went into S&P 1070 this AM.  I have replaced that with a bit larger SPY put position which I will hold unless the S&P 500 jumps over highs of the day.  EDIT 11:48 AM - sold those puts, I want to see a break below lows of the days to press anything short since it's such a quiet session and without emotion the market rarely goes down. I prefer to own these on trend days when the market goes in 1 direction all day; instead today is a chop day; just going back and forth in a small range of 6 S&P points.

Long Sandisk in fund; no personal position

BW: CGM Focus's (CGMFX) Ken Heebner - a Hot Touch Gone Cold

It is amazing what a few years will do to you.  Not 2 years ago Ken Heebner of CGM Funds was the most celebrated mutual fund manager since Peter Lynch.  [May 28, 2008: Ken Heebner - America's Hottest Investor]  His mad dash concentrated style broke the mold in a staid profession.  [May 6, 2008: Ken Heebner's Trading for CGM Focus Tripled in 2008]   But the Fortune from mid 08 story pretty much tick tocked his performance.  The next year was a disaster.  [Jul 14, 2009: Bloomberg - Ken Heebner Slumps for 2nd Year]  And this year has been no great shakes with a 11% loss YTD.  Like I said in many pieces in 2008 and 2009 I don't think he got dumb overnight - his long term record still is remarkable - [Dec 31, 2009: WSJ - Best Stock Mutual Fund of the Decade] but in many interviews on CNBC I have been struck on how bullish Heebner has been (and continues to be) on the general economy.   Most mutual funds do not short, but his charter allows him to - but it was rarely employed; a big error considering what happened in 08 and early 09.

I have not looked at the portfolio lately but I was in a bit of shock when I looked this morning; I've seen Heebner concentrated before but never like this.  Ford (F) is 15% of the portfolio; the top 4 positions are nearly 40% of the portfolio.  I can definitely see the reasons for Ford and Goldman Sachs but if he employed technical analysis many of these names would be nowhere near the top of his portfolio - but this is definitely a 'fallen angel' + 'commodity' playbook.  Ex the one company every human on earth must own - Apple (AAPL) of course.  I still admire the conviction to have a concentrated portfolio - I've long said anyone who holds 350 stocks (which is almost all funds!)... unless relatively concentrated in the top 10-20, is basically buying the market with a bit of a spin on it.  But the trick to being concentrated is of course being in the right spots.

Top 10 holdings

Security Net Assets  
Ford Motor Company (F) 15.12%  
Goldman Sachs Group, Inc. (GS) 8.09%  
Freeport-McMoRan Copper & Gold B (FCX) 7.97%  
Teck Resources Ltd Subordinate Voting Share (TCK) 7.59%  
FedEx Corporation (FDX) 6.23%  
Cliffs Natural Resources Inc. (CLF) 6.04%  
Delta Air Lines, Inc. (DAL) 5.89%  
Apple, Inc. (AAPL) 5.46%  
Alpha Natural Resources Inc (New) (ANR) 5.24%  
Morgan Stanley (MS) 5.20%

These are, of course, Q1 holdings as of March 31st and with his style the portfolio could have a different complexion by now; we won't know until mid August.

Via BusinessWeek:
  • Ken Heebner started the century making all the right moves for his CGM Focus (CGMFX) mutual fund. Deftly shifting into and out of sectors such as homebuilding and commodities, he posted returns averaging 32 percent annually from 2000 through 2007, a period when the Standard & Poor's 500-stock index returned just 1.7 percent a year
  • Then the magic stopped. CGM Focus, which Heebner runs from Boston, is the only domestic stock fund to trail at least 96 percent of its peers in 2008, 2009, and again this year, according to research firm Morningstar. The main culprits: bad bets on commodity and financial stocks. "He's been in all the wrong sectors at all the wrong times," says Jonathan Rahbar, a Morningstar analyst. 
  • Even with the losses, Heebner is holding his spot atop the 10-year chart. CGM Focus returned an average of 17 percent a year in the decade ended May 31, the best record of more than 3,200 U.S. diversified mutual funds. In second place was Lord Abbett Micro Cap Value, which gained 14 percent. 
  • Heebner, 69, the co-founder of Capital Growth Management, launched CGM Focus in 1997; it has returned 13 percent a year since then. He also manages CGM Mutual (LOMMX), which has returned 4 percent a year for the past decade, and CGM Realty (CGMRX), which gained 19 percent annually over the same stretch. He declined to be interviewed for this story.  
  • Heebner's nosedive rivals that of Bill Miller, the high-profile Legg Mason fund manager who beat the S&P 500 for a record 15 consecutive years, then dropped to the back of the pack from 2006 through 2008. Like Miller, Heebner has lost investors, with net withdrawals of $1.8 billion since August 2008, according to Morningstar. CGM Focus' assets are now $3 billion, down from a peak of $10.3 billion in June 2008, reflecting market losses and investor withdrawals
  • Unlike Miller, he lagged the market last year, gaining 10 percent while U.S. stock funds on average rose 33 percent. Miller's Value Trust was up 41 percent. Steven Rogé, who invests his clients' money in mutual funds, says the ballooning of Heebner's assets in 2008 convinced him there were better places to invest. "When a fund attracts assets that quickly, we worry about a manager's ability to handle it," says Rogé, whose firm, R.W. Rogé, oversees $200 million. 
  • Heebner is known for building big stakes in specific industries and for shifting gears quickly. CGM Focus' top 10 holdings represented 73 percent of assets of as Mar. 31, vs. 31 percent for the typical fund, according to Morningstar. 
  • The fund's turnover ratio, a measure of how much the portfolio changes in a year, is 464 percent, more than four times greater than peers. Heebner also bets on falling stock prices by selling short, a strategy that many funds don't pursue. 
  • In 2000 and 2001, Heebner profited by betting against technology stocks. At the same time he began buying shares of homebuilders, such as Lennar (LEN), before the boom in construction and home prices. By the start of 2005, before homebuilding stocks began their decline, he had sold them and moved into energy and commodity companies. The price of oil more than tripled between the end of 2004 and the middle of 2008. "Historically he has done phenomenally well knowing when to rotate," says Rahbar.  (this was one great trend trade after another - nailed)
  • More recently his moves have been ill-timed. Returns faltered in the second half of 2008, when Heebner's holdings in energy, metals, and agriculture stocks began to tumble. After selling the commodity stocks he bought financials.  CGM Focus dropped 48 percent for the year (2008), compared with a decline of 37 percent by the S&P 500. 
  • Heebner sold his insurance holdings at a loss in the first quarter of 2009. That hurt: Many of those stocks soared after the market reached a 12-year low in March.  Heebner is getting back into commodities and sticking with financial stocks.  Metal and mining stocks accounted for 36 percent of his holdings as of Mar. 31. (of course these stocks have been hammered in May on European issues and fears of new global slowdown)  Bank stocks represented 16 percent of the portfolio. (hammered on finreg) So far the strategy isn't paying off.
  • The declines since 2008 "don't indicate Heebner has lost his talent or his expertise," says Ronald Sugameli, manager of the $130 million New Century Alternative Strategies Portfolio (NCHPX), a mutual fund that invests in other mutual funds. CGM Focus represented about 1.5 percent of Sugameli's fund as of May 31. While he expects Heebner's performance to bounce back, the fund manager isn't planning to boost his holdings of CGM Focus. Given the fund's volatility, Sugameli says, "it is best used in small doses."

Back to Same Game Plan as May

Yesterday's mid afternoon anticipatory buyers are currently caught as indeed that rally was a fake out.  My goal of reaching S&P 1070 was essentially hit as the market swooned down to 1071. 

At this point I am treating the market identically to how I viewed it in the second half of May; one big range divided into two sub ranges.  The big range being 1040 to the 200 day exponential moving average (let's call it 1100) i.e. 60 points.  1070 seems to be the dividing point because that mirrored Dow 10,000 in May... wheras now there is some variance as the Dow has outperformed the S&P 500 (i.e. S&P 1070 = Dow 10,075 or so).  Either way, the 2 sub ranges will be 1040 to 1070, and 1070 to 1100.   As you get to the lower end of that sub range the thinking is to lighten up on short exposure and then pounce if you break to the lower end of the other sub range... i.e. lighten up near 1071-1072 and then remount if the market breaks to 1068 and press for a move to 1040.  Or if one wants to be very aggressive, you can even go long as we come into the support of 1070, trying to catch an oversold bounce nearer to 1100.

[click to enlarge]

I prefer to play the primary trend (which is down), rather than to get very cute and try to catch both the up and down moves since it just increases the degree of difficulty and opens up more chances for mistakes.   But as we type, we are sitting at the low end of subrange #1.  Either 1070 holds or does not.  A very aggressive player would lift shorts here and try to play a bounce I suppose, with a tight stop just below 1070. I would have much preferred to see a big down open today to shake everyone's hopes as that would have been a good place to trying some long side forays, at least for a quick trade.  But with the up open, it's just "meh" as we are in the middle of the 60 point range.  We can go up 30 S&P points from 1070 and still it would mean nothing, while 30 points down just takes us to the long term support.

The market is having a terrible week, down about 4% and trading in yet another huge weekly range of 60 S&P points.  Just as we have in many of the previous 3-4 weeks.  Completely bipolar action and impossible to build intermediate positions in this environment. 

Longer term, caution reigns again as long as we're below the 200 day moving average(s).  That does not mean necessarily to be all out short or try to score a 10% win for the portfolio on the downside.  It means capital preservation as first priority and monetary gains on top of preservation is the cherry on top.  Making up a 3% loss is much easier than a 13% loss.

Prone for an oversold bounce yet again? Surely the odds increase after such a large drop.   Financial 'reform' is now done, so its off the table as an uncertainty and now the oligarch's lawyers get to work, running circles around the 1900 page document and effectively neutering it.  G20 meeting this weekend where much hot air will be circulated.... hopefully won't melt the polar ice caps further.

Tibco Software (TIBX) Reports Solid Beat, Raised Guidance

Oracle (ORCL) and Research in Motion (RIMM) stole all the earnings attention last night, but Tibco Software (TIBX) put out some solid numbers and raised guidance. Right now almost every stock is hostage to the overall market as student body left trading has replaced valuing stocks on their own merits, so the news will probably go on deaf ears after an initial spike.  (stock is up about 7% in premarket)  Full report here.

  • Business software maker Tibco Software Inc (TIBX) posted better-than-expected quarterly results, helped by growth in its core service-oriented architecture (SOA) business, and forecast third-quarter results above estimates.   "It's (Tibco's results) a combination of improving environment, growing appetite (among customers) and good execution on our part," Tibco Chief Executive Vivek Ranadive told Reuters.
  • Tibco posted a second-quarter net income of $12.8 million, or 8 cents a share, compared with $10.1 million, or 6 cents a share, last year.  Excluding items, the company earned 15 cents a shareRevenue rose 21 percent to $173.3 million.
  • Analysts on average were expecting earnings of 13 cents a share, excluding special items, on revenue of $161.4 million. 
  • During the quarter, there were 12 deals over $1 million, up from 11 deals over $1 million last year.
  • "Our core SOA business grew 34 percent (during the second quarter) over last year," Ranadive said in a statement.  Tibco has long been linked with SOA, a technology that allows for the breaking down of bulky applications into separate business services and trim the cost of delivery. SOA made up nearly two-thirds of total license revenue during the second quarter.


  • Tibco, which has trumped consensus earnings estimates for the past eight quarters, forecast third-quarter adjusted earnings of 15 cents a share, on revenue of $172 million to $177 million.  The forecast tops analysts' expectations for earnings of 14 cents a share, excluding special items, on revenue of $165.3 million.
  • "Our second half (of the year) pipeline continues to strengthen as we see strong demand for our products," Chief Financial Officer Sydney Carey said on a call with analysts.   Deferred revenue, an indicator of future revenue, grew 26 percent to $195 million, CEO Ranadive said. The strong growth lends him confidence in Tibco's prospects for the next quarter.
  • Tibco bought back 3.4 million shares of its stock during the quarter.

Technically the stock has done well when the market is benign but keeps getting hurt with the dramatic swoons.  Again, hostage to the greater market due to no fault of its own; it is just about at the same spot it traded at the beginning of this selloff in late April.

[May 12, 2010: Bookkeeping - Starting Tibco Software]

Long Tibco Software in fund; no personal position

Thursday, June 24, 2010

2010 Fund Performance Period 6

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For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we moved to a new tracking system in 2009 (Investopedia.com) as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence while the website and portfolio began in August 2007, we "began anew" in terms of performance with portfolio "B" as of early 2009. Detailed history on latter 2007 and 2008, as well as 2009, [Jan 7, 2010: 2009 Final Performance Metrics] can be found on the above mentioned tab. For 2010 our sixth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

Period 6 was volatile but not as heart stopping as the big downdraft in period 5.  While economic news was weaker in this period, everything seemed to trade off technicals.  S&P 1040s level was the key - these were lows of the year in February.  The market first tested it early in the period, rallied to the 200 day moving average, fell back yet again to retest it and then bounced hard again - this time breaking through the 200 day moving average with a lot of help with 'premarket surges'.   The period closed right below the 50 day moving average.

During the time frame bad employment data, bad housing data, and bad retail data was announced in the U.S. - aside from the employment data which had the market sell off sharply for 2 days, the rest of it was quickly ignored.  One of the big rallies of the period came because Prez Obama promised  us a strong jobs report - this crushed the spirits of the bulls when it was proven false.  But again, 3 sessions later that was all ignored.  China continued to underperform and copper fell off a cliff before rebounding late in the period.  BP crushed the oil stocks for most of the period. Fund performance was solid considering the extreme volatility - we caught some nice intraday swings but mostly "stayed out of the way" (very high cash) since the market had no memory from day to day.  Multiple 90%+ days happened and big losses were followed within 48 hours by big gains. 

For the sixth "four week" period of 2010 the fund returned +6.4%, versus the market's +2.8%, so an outperformance of +3.6%.
On a cumulative basis in 2010 the return is +40.6%, versus the Russell 1000's +0.7%, so an outperformance of +39.9% for the year to date. (thus far 24 weeks)

Period 6 was a period of both absolute performance (making money) and relative performance (outperforming the market) - our favorite kind. The yearly goal of beating the index by 15% is on track.


*** Long/Short Fund Discussion below

Overview: Since the S&P 500 was under the 200 day moving average for most of this period we continued to stay very high in cash.  Due to the extreme volatility and +3% days following multiple days of losses in the market, it was dangerous to be short indexes overnight as well.   Hence, much of the shorting was done intraday with index positions (TNA ETF and SPY puts).  We made some good change on "the President tricked us Friday!" in week 2 as the disappointing employment data caused a huge swoosh down.   With that said, after disobeying technical analysis for a long period of time this period was incredibly correlated to TA - which in a sense made it easy.  Everyone was looking at S&P 1040 and the market bounced off that level twice - this allowed traders to cut back their shorts when we hit that level and get out of the way of bounces; or in fact partake on the bounce.  I made some long plays late in the period into stocks with relative strength once the market cleared the 200 day moving average.

Below is the chart for period 6:

Week 1: Entered the week: Cash 85%, Long 14%, Short 2%

Entering the week the S&P was in the 1080s and everyone we had segmented the market into 2 ranges: 1040 to 1070, and 1070 to 1100.  Once 1070 broke on Tuesday of this week, the market was crushed in 1 fell swoop, down to low 1040s.  We made some hay on the short side that specific day for some nice intraday gains on the short side... and then the market bounced strongly for a reversal.  By Thursday we were already back up to the 200 day moving average of 1100, showing you the IMMENSE volatility.  From 1040 to 1100, 60 S&P points in 2 days!

On the long side:
  • Tuesday, as the market swooshed down I was taken out of larger positions in F5 Networks (FFIV) and Tibco Software (TIBX) as they finally broke support... F5 regained support by the end of the day as the market rallied from -3% to flat for the day. Both positions were pared back.
  • Intercontintental Exchange (ICE) was closed simply because I wanted to open spots for other positions in the fund; however the stock regained support by the end of the week as well showing some nice relative strength.
  • I began stakes in Polaris Industries (PII) and Valassis Communications (VCI) both on relative strength in their charts - the former name also announced they were moving hundreds of jobs to Mexico and away from America.
  • Thursday, I closed NetLogic Microsystems (NETL)as the stock had broken support and rallied into resistance.
  • I replaced NETL with Chinese chip market Spreadtrum Communications (SPRD) - just a starter stake.
  • Quality Systems (QSII) reported and missed, somehow the stock was only down 5% - but with the chart broken I decided to part ways and look to replace it with something else in the future.

On the short side:
  • Wednesday, I sold the majority of the remaining long dollar position in Powershares DB US Dollar Bullish (UUP).
  • Thursday on the swoosh up day, I attempted to short both Ross Stories (ROST) and Steve Madden (SHOO) - 2 retailers. I was stopped out of the Steve Madden position within hours for a minor loss.

Week 2: Entered the week: Cash 83%, Long 14%, Short 3%

Four day week with Memorial Day Monday.  Markets rallied on President Obama's pledge that we'd see a great jobs report, instead we were crushed Friday as only census jobs showed up.  More immense volatility as we bounced between 1100 and 1060, a 40 point range.

On the long side:

  • I bought back some Tibco Software (TIBX) and F5 Networks (FFIV) but less than 1% into each. 
  • I closed home builder Lennar (LEN) as it had a nice run in April but had not been performing lately as it is becoming obvious that the housing market is not doing very well.  I was hoping for a seasonal play but the window of opportunity was short.
  • Friday, I closed Capital One Financial (COF) for similar reasons to Lennar in terms of technical set up.
  • Thursday I said keep an eye out on natural gas with the 2 choices to play being the gas itself via ETF, or companies that produce the gas.  Friday I decided to buy First Trust ISE Revere Natural Gas (FCG) which focuses on the companies. 

On the short side:

  • Wednesday when the S&P 500 surged 3% on Prez Obama's promise of a "strong" jobs report, we were stopped out of our Ross Stores (ROST) short for a 2% loss. 
  • Friday, I bought some June 108 SPY puts when the S&P 500 broke 1080 as an intraday hedge versus my long book... I took one third off the table for decent profit when the S&P hit 1072ish but said if the market broke down below 1068 or so I'd add those back.  Instead I ended up buying some June 107 SPY puts when the market weakened, and sold 90% of both positions in the closing moments of the day to avoid any weekend headline risk.

Week 3: Entered the week: Cash 85%, Long 13%, Short 2%

The market looked poor entering the week - the only question was would the S&P 500 bounce off 1040s or break through.  In retrospect it ended up being a bounce, and from there a hotshot rally that more or less continued through the end of the period.

On the long side:

  • Early in the week I cut back Tibco Software (TIBX) and F5 Networks (FFIV) as they both broke support, once again marking a short term reversal.
  • I closed TriQuint Semiconductor (TQNT) which was simply not performing.
  • I created a starter position in Salesforce.com (CRM) when it fell to initial support, as I create a wing of the portfolio where valuation means nothing.
  • Wednesday, I put on some modest index long positions expecting a bounce - but was shaken out by the late day reversal.
  • I closed SL Green (SLG) and Riverbed Technology (RVBD) as the stocks had rebounded a bit from their worst levels but there were many other stocks with far better conditions in their charts.

On the short side:
  • Tuesday, I sold all my SPY 107 puts and 2/3rds of my SPY 106 puts as the market went down into the 1040s, for a nice profit. I sold the rest as the market began to bounce over 1050.
  • I shorted Irish airline Ryanair (RYAAY) with a simple technical set up - the stock is near the 200 day moving average. 

Week 4: Entered the week: Cash 85%, Long 11%, Short 4%  

A continued bounce - the 200 day simple moving average was 1108 so traders were looking for that to break.  Despite a late day reversal Monday, premarket magic took the S&P 500 up 0.8% in premarket (on no news) Tuesday which provided the juice to get us through the 200 day.  Wed-Fri were snoozers as the market consolidated the huge 8% move in the previous 7 sessions.  As the market broke over the 200 day I went more net long.

On the long side:

  • Tuesday, I added to First Trust Reverse Natural Gas (FCG) - My call on natural gas was very prescient but my choice of instrument underperformed.
  • Wednesday, I added a 2% allocation back to F5 Networks (FFIV).
  • Wednesday, I closed ETFS Physical Palladium (PALL) - it has become a hedge fund play thing that trades no different than an "Ultra Long" S&P 500instrument.  When risk is "on" everyone piles in, when risk is "off" everyone piles out. 
  • I restarted a 2.1% position in Sandisk (SNDK) which had a "Barron's bump" Monday, but I liked the chart in the intermediate term. 
  • I restarted a 2% position in NetLogic Microsystems (NETL) as the networking space - shunned just 2 weeks ago - is now the favorite.  I went with a name that was in an earlier stage of breaking out hoping we can still catch some waves.
  • I added another 1.1% allocation to Powershares DB Double Gold (DGP) as the commodity broke out to a new yearly high.

On the short side:

  • Monday the premarket magic hit and I wanted to get short as the S&P 500 headed to the 200 day moving average creating some hedges in case there was a rejection.  I shorted Hartford Financial Services (HIG) and Netease (NTES).
  • Ryanair Holdings (RYAAY) which had been shorted the previous week right at its 200 day moving average, crossed above so my stop loss of 2% hit.
  • Three additional limit short orders hit: Energizer Holdings (ENR), Pitney Bowes (PBI), and Green Mountain Roasters (GMCR).
  • Tuesday morning after seeing a "FAST MONEY" clip where Joe Terranova said coffee was rising so the "logical" way to play was to buy Green Mountain Roasters - which made little sense to me - I decided to cover first thing in the morning since this sort of 'logic' by masses of people is not what I wanted to get in front.  We got out with a 2% loss, the stock actually surged some 7%ish that day.
  • Late Tuesday, I shorted Celanese (CE). This was covered for a quick 5% gain Thursday morning.  When the stock bounced Friday, I reshorted it..
  • Wednesday, I shorted Discover Financial Services (DFS).


[May 26, 2010: 2010 Fund Performance Period 5]
[Apr 28, 2010: 2010 Fund Performance Period 4]
[Apr 1, 2010: 2010 Fund Performance Period 3]
[Mar 2, 2010: 2010 Fund Performance Period 2]
[Feb 2, 2010: 2010 Fund Performance Period 1]
[Jan 7, 2010: 2009 Fund Performance - Final Edition]

For previous years please see tab 'Performance / Portfolio' (we were using other tracking mechanisms at the time)  

Almost Every Trader on Realmoney.com Went Long on that Mini Bounce

Rarely do you see such a consensus from a bevy of traders; that bounce and move over 1081-1082 on the S&P 500 (1-2 PM rally) seemed to get their animal spirits up, with Doug Kass leading the charge.  The lemming pledge is alive and well.

  • Doing Some Buying

    By Rev Shark
    RealMoney.com Contributor

    6/24/2010 2:07 PM EDT

  • Mark Casa
    Everyone's attending this party
    6/24/2010 1:51 PM EDT
    I too have added some individual names to my long tech exposure (NVDA, MSFT, CSCO), as well as some financials (JPM to name one

  • Scott Rothbort
    Q'ing Up
    6/24/2010 1:42 PM EDT
    I am putting some of my cash to work throughout today in the Q complex buying PowerShares QQQ (QQQQ) and Ultra QQQ ProShares (QLD).

I believe them to be over eager beavers as at the minimum 1070 needs to be tested.  Can the kettle really boil if they all are staring at it anticipating it to boil?  Further none of the generals - Salesforce.com, Apple, Chipotle, and the other 5-6 'teflon' stocks - have felt much pain at all, most are happily drifting right around their 20 day moving average.

So now both the trading blogs and almost the entire website of Realmoney.com is forecasting a bounce right here.  We'll see.


Bookkeeping: Covering Hartford Financial Services (HIG) Short

I am covering my last individual short position Hartford Financial Services (HIG) for a 4% gain.  I've replaced it with a small short of the indexes via TNA (less than 2%) but I want to be shorting either right below 1100 or below 1070.  In between those ares is a vast area of 30 S&P points that means little to me.  I will look for new individual names to short if we can get any sort of bounce here - net, net of all the individual names I shorted (about 8) I probably only came out with a small gain due to the Monday morning mess, so a lot of work for nothing. :)  Theoretically other than Discover Financial and Ryanair they all would have worked in time - but theory is only good for academic papers.

At this point I'd actually like to see a bounce into S&P 1100 to remount the short side of the book.  Or a move below 1070 which would give me more confidence we are headed to the 1040s in time.

Short TNA in fund; no personal position


Monday's "You Got Punked" Short Stop Losses

Since the market had been gapping up and down so much the past 4-5 weeks, I decided a few weeks ago to go back to the old fashioned hedging and build up a portfolio of names on the short side of the book, to offset longs. Coming into the week I was net long, and said if the S&P 500 jumped over 1120 my stop losses would trigger on the short side and I'd be even more net long.  Which was fine by me as 1120 was the level I had been waiting for to get constructive again.

Not so fast!

We did get over 1120 Monday but it was illusionary - it was created by premarket magic when the S&P 500 immediately opened at S&P 1125 before a quick run to 1130 in the opening hours of the week.  From there it has been all down hill. 

I do like to review all trades after the fact to see what, if anything, should have been changed.  Sometimes the answer is nothing and the market just "gets" you - which is what happened this week.  My tight stop losses hit (as they should have) and 3 of my shorts were dumped in the opening hours. While I would not change the process (since all these stocks broke over resistance), in retrospect I got punked.  It happens.  I suffered losses of 2-5%, whereas in retrospect if not for the Chinese yuan announcement most likely these stocks would of not jumped like Mexican jumping beans and looking at them now I would have had very nice winners on 2 of the 3 positions.  The third, Discover Financial Services (DFS) had an earnings report last night so I would of been out of the position ahead of that since earnings risk is not my thing.

These 2 are carbon copies - you can see how I was fleeced Monday morning and since then all downhill.  CE especially hurt since my stop loss was for 2% and the stock gapped so strongly I got taken out at a 5% loss.

This 1 was an anomaly due to earnings; I don't take earnings risk from the long or short side 90% of the time so we'd have cleared deck ahead of the announcement.  Would have been a flattish trade.

Like I said, these things happen over the course of time - but when anyone says being short in a downturn is easy.... well, not so much.

No positions


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